Ad networks, consumer tracking, and privacy (joint with Antonio Russo)

Abstract: 

We study the role of ad networks and consumer tracking in the online advertising market, in presence of multi-homing consumers and advertisers. We consider two ad-supported publishers, selling ads to advertisers either directly or via an ad network. Multi-homing implies that ads may be wasted, hitting already informed consumers. Differently from publishers, the ad network can track consumers across publishers. We show that, when the sale of ads is outsourced to the ad network, the ad level may decrease compared to the case where publishers compete. Also, improved tracking capabilities may lead to less ads being shown to consumers. Endogenizing the choice of consumers to block third-party cookies, which affects the ability of the ad network to track, we find that blocking may be too high or too low in equilibrium. This occurs because, when consumers decide to block cookies, they do not internalize the externalities they impose on other consumers (by blocking cookies they affect the incentives to advertise) and on publishers (tracking increases revenues from multi-homers). This analysis implies that a privacy policy that reduces tracking by reducing the cost of blocking cookies may have adverse effects on welfare and consumer surplus.